Mortgage Bias: Economic Jim Crow

(The Root) --The mortgage crisis of 2008 has revealed the true color of money: black and white. On July 12, Wells Fargo -- the largest residential mortgage lender in the United States -- agreed to a $175 million settlement in a racial-discrimination suit brought by the Department of Justice. The case originated with charges first alleged by the city of Baltimore four years ago, in which officials accused Wells Fargo of "systemic discrimination" -- steering African-American and Latino borrowers into high-cost loans and charging them excessive fees.

Critics agree that $175 million is only a small fraction of the damage done, but it represents the second-largest fair-lending settlement in the DOJ's history. It follows last year's $335 million settlement with Bank of America over similar accusations arising from the practices of Countrywide Financial -- the mortgage unit that Bank of America acquired in 2008. SunTrust Bank was also assessed a $21 million fee for engaging in discriminatory lending practices just two months ago, and investigations are ongoing at Citigroup, JPMorgan Chase and other major lenders.

What is disturbing is that as a condition of the settlement agreements, all three companies refused to admit guilt -- instead, each concluded that settling was a way to avoid years of litigation. As such, no criminal charges were brought, nor punitive damages applied. And despite all the hopes of good intentions, it is quite likely that these practices will continue.

A "Racial Surtax"

So what actually happened? According to the Washington Post, 34,000 black and Latino borrowers across 36 states were targeted for unfavorable loans between 2004 and 2009 -- the height of the subprime-lending boom. The Justice Department found that, among Wells Fargo mortgages, highly qualified black borrowers were four times as likely -- and Latino borrowers three times as likely -- as whites with similar profiles to receive a subprime loan. In addition, the DOJ determined that these practices may have affected as many as 400,000 minority borrowers nationwide, many of whom were offered subprime loans despite qualifying for prime mortgages. This practice allowed independent brokers and banks to earn more in fees and precipitated the financial crisis.

Even when they managed to get a prime rate loan, African Americans still paid an average of $2,064 more in fees, the Washington Post reports. And in addition to higher fees, blacks and Latinos were burdened with higher interest rates -- making their monthly cost significantly more than that of their white counterparts. This amounted to economic Jim Crow, since it imposed a separate and unequal inflation of mortgage lending costs specifically based on race. Thomas Perez, assistant attorney general for civil rights at the DOJ, has said that in Baltimore and the Washington, D.C., metro area, 4,500 minority homeowners were charged a "racial surtax."

The DOJ compiled extensive interviews with Wells Fargo employees that describe a company culture in which brokers were encouraged to offer minorities loans at higher rates that they knew they could not afford. The credit crunch subsequently led to widespread defaults and foreclosures in African-American and Latino communities, drawing light to the disparities. A November 2011 report (pdf) by the Center for Responsible Lending found that from 2004 to 2008, 25 percent of all black and Latino borrowers lost their homes or were seriously delinquent, compared with 12 percent of whites.

Banks in general -- and investment bankers in particular -- continued to profit by betting against these "subprime" borrowers' ability to pay. By creating complicated credit swaps, options and derivatives, the corporate investors hedged their bets and made money even when average people were experiencing the horror of losing their homes.

And this is where the corporate greed of Wall Street met the economic malaise of Main Street. "This is a case about real people -- African American and Latino -- who suffered real harm," Perez told the Washington Post. As part of the settlement, Wells Fargo has agreed to direct $50 million to seven major metropolitan areas and to help minority borrowers afford down payments for new homes.

People forced into subprime loans will receive about $15,000, and between $1,000 and $3,000 is allotted for those charged high closing fees. Residents of Chicago, Cleveland, an area east of Los Angeles, New York City, Philadelphia and the Oakland-San Francisco area will benefit. And in Baltimore, Wells Fargo is required to provide $4.5 million for community-improvement projects and $3 million for local housing and foreclosure programs.

But is this enough to make a real difference? At the heart of the case remains age-old racial injustice, which has precipitated disproportionate levels of poverty, unemployment, scarcity and want -- particularly in black communities.

The Black Middle Class Under Attack

In the case against Wells Fargo, Baltimore officials argued that because many of the mortgages were essentially designed to fail -- fail they did. As the national economy contracted and people lost jobs, the inflated costs of their housing became unbearable. When families were forced out of their homes, the communities experienced a domino effect. In inner-city Baltimore, the increased number of vacant homes sent property-tax revenues plummeting, reducing home values exponentially and increasing the costs of public services, like police and firefighters.

The result? The city -- now reeling from budget woes -- was forced to cut public workers, firing police officers and closing fire stations, further exacerbating the community's problems and helping to destroy its African-American middle class.

This pattern has been replicated across America and contributes to the disproportionately high unemployment rate of 14.4 percent for blacks and 11 percent for Latinos, while white Americans continue to experience an unemployment rate of 7.4 percent -- nearly a full percentage point less than the national average. But the damage -- which is systemic and now affects access to future credit because of lower credit scores -- will have a negative impact on generations of African Americans in the same way that slavery, legalized discrimination and the war on drugs continue to plague our communities.

Thomas Perez echoed the concerns of economists and civil rights activists when he addressed the effect of poor credit ratings on minorities. "The impacts of lending discrimination and the harm to a person's credit can be far-reaching -- inhibiting a range of opportunities that affect a person's ability to find housing, good employment or access to higher education," Perez told the Washington Post.

Herein lie the reasons that the race-based generational wealth disparity persists. Losing your home leads to a bad credit rating; a stalled economy and institutional discrimination make you less likely to find employment; and you need good credit for most private student loans and many middle-class jobs -- thus limiting nearly all of your options. As a result, far too many African Americans and Latinos become trapped in a cycle of poverty. These circumstances are particularly disturbing given that the banks profited and received bailouts funded by tax dollars paid to the government by the very workers their discrimination affected.

President Barack Obama and Attorney General Eric Holder have been committed to uprooting these destructive practices, but it seems that the system is too thoroughly corrupt. Just to place Wells Fargo's $175 million settlement in perspective, it represents only 4 percent of the bank's latest $4.2 billion quarterly profits. And banking bonuses in 2011 were at an all-time high. This means that as unemployment steadily rises in minority communities and the effects of racial discrimination continue to be felt, the people who caused the crisis enjoy the fruits of their ill-conceived labor.

As the presidential campaign is being waged, President Obama's Republican challenger, Mitt Romney, boldly promotes a platform of deregulation -- promising to dismantle the Consumer Financial Protection Bureau and to repeal Dodd-Frank banking regulations. Such acts would serve only to further promote a plutocratic economic elite who feed off the malaise of the black, the brown and the poor.

Edward Wyckoff Williams is a contributing editor at The Root. He is a columnist and political analyst, appearing regularly on MSNBC, Al-Jazeera and national syndicated radio. Follow him on Twitter and on Facebook.